Investiv Daily

24 Aug

FAANG bubble? Basic valuation analysis says YES!

This New Tesla Coil is the Future of Electricity

In 1891, Nikola Tesla stunned the scientific community by inventing a device that could transmit electricity through the air. This breakthrough device could power light bulbs and electric motors wirelessly, at a distance of a few feet.

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It’s not quite 20 years since the “dot-com boom” became the “dot-com bust,” but as the market extends itself into the longest bull market in history, it’s hard not to see some of the same characteristics between the stock market in the years leading up to that crash and this one. More →

By Thomas Moore Amazon Apple Facebook Google Investiv Daily Netflix Technology Valuations
23 Aug

Is OC’s discount worth the fundamental risk?

Watch America’s #1 Trader Officially Become $1,050 RICHER in 15 SECONDS!

And then $940 RICHER in 11 seconds… $1,260 RICHER in 8 seconds… and $988 RICHER in 7 seconds! You’ve never seen anything like this. And you may NEVER see it again! His secret to becoming a multimillionaire is so easy that anybody can do it!

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One of the classic hallmarks of the economy’s health and strength is the housing market. Stocks of retail companies like Home Depot (HD) and Lowe’s (LOW) often serve as proxies of to guide the market’s perception of the housing market, but it also isn’t uncommon to see experts and analysts referring to homebuilders like D.R. Horton (DHI) and Toll Brothers (TOL) in the same way. More →

By Thomas Moore Housing Market Investiv Daily
22 Aug
SAFM is a small-cap, defensive diamond in the rough
Watch America’s #1 Trader Officially Become $1,050 RICHER in 15 SECONDS!

And then $940 RICHER in 11 seconds… $1,260 RICHER in 8 seconds… and $988 RICHER in 7 seconds! You’ve never seen anything like this. And you may NEVER see it again! His secret to becoming a multimillionaire is so easy that anybody can do it!

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If the extended state of the market’s bull run – which is nearly 10 years in the running now – is starting to make you wonder how much longer the “good times” are going to last, you’re in a relatively small, but growing group of people that are becoming increasingly wary. One of the things that not a lot of people understand, however is that even in a bearish market, you can keep finding good stocks to invest in with good long-term growth potential, if you’re willing to be cautious and selective. You also have to be able to work with a long-term perspective, because if the economy and the market do begin to reverse, the turn lower can come very quickly; that often means that even stocks that right now are trading at great valuations and fit into the “bargain” category under current market conditions are at risk of following the broader market’s trend to the downside.

One way you can try to minimize some of that risk is by focusing on stocks that analysts and experts like to call “defensive” in nature. These are businesses that offer products or services that are needed no matter what the economy is doing, so their revenues generally manage to be pretty stable. If they’re conservative about the way they manage their business, that usually means that even if their profits get squeezed by tighter economic conditions, they’ll be able to weather the storm better than most other stocks in more cyclic sectors and industries.

One of the industries that fits into this “defensive” category is Food Processing. This is an industry that includes some big, well-known names like Kellogg Company (K), General Mills (GIS), Kraft-Heinz (KHC), Campbell Soup (CPB) and Tyson Foods (TSN). Over the last year or so, this is also an industry that has come under a lot of pressure by investors who have been concerned that consumer trends are shifting away from many of these traditional names to smaller, trendier companies who are perceived as offering healthier options. The bigger companies have been scrambling to find ways to adjust to this shift, but that has also created some nice value options in the industry with stocks that have a terrific fundamental profile to use as a baseline and the size, resources, and responsiveness to make the adjustments they need to stay relevant.

One stock in this sector that I think has a great fundamental profile to work with, and appears to already be well-positioned to work with the trend toward healthier food options is Sanderson Farms Inc. (SAFM). This is a small-cap stock that a lot of people might not recognize at first blush; but this is a company with a singular focus. Investors who prefer to see a company with a diversified portfolio might look at the fact SAFM focuses exclusively on protein from poultry as a negative; but this is the third largest poultry processor in the United States, with a model that allows them to function profitably as a low-cost provider of protein products. As I think you’ll see, there is a pretty strong case to be made for this stock as a serious value opportunity, even under current market circumstances.

Fundamental and Value Profile

Sanderson Farms, Inc. is a poultry processing company. The Company is engaged in the production, processing, marketing and distribution of fresh and frozen chicken, and also preparation, processing, marketing and distribution of processed and minimally prepared chicken. It sells ice pack, chill pack, bulk pack and frozen chicken, in whole, cut-up and boneless form, under the Sanderson Farms brand name to retailers, distributors, casual dining operators, customers reselling frozen chicken into export markets. The Company, through its subsidiaries, Sanderson Farms, Inc. (Production Division) and Sanderson Farms, Inc. (Processing Division), conducts its chicken operations. Sanderson Farms, Inc. (Production Division) is engaged in the production of chickens to the broiler-stage. Sanderson Farms, Inc. (Foods Division) is engaged in the processing, sale and distribution of chickens. The Company, through Sanderson Farms, Inc. (Foods Division), conducts its prepared chicken business. SAFM has a current market cap of about $2.4 billion.

Earnings and Sales Growth: Over the last twelve months, earnings declined by more than 37%, while revenues were mostly flat. In the most recent quarter the picture was markedly improved, as earnings tripled and sales grew a little over 5%.

Free Cash Flow: SAFM’s free cash flow is healthy, at about $142.5 million.

Dividend: SAFM’s annual divided is $1.28 per share and translates to a yield of 1.18% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for SAFM is $66.47 and translates to a Price/Book ratio of 1.56 at the stock’s current price. The stock’s historical average Price/Book ratio is 2.08, which puts a target price for the stock a little above $138 per share – nearly 33% above its current price. That puts the stock in a range it last saw during the last week of 2017.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. After reaching a peak around $175 in early December of last year, the stock began an accelerated and extended drop to a downward trend low around $97 by June of this year. Since finding that bottom, the stock has been hovering in a range between $97 at support and resistance at around $109 per share. The 61.8% retracement line, at a price level around $113, is a pretty good visual reference for the point the stock would need to rally to in order to reverse the stock’s current downward trend.

Near-term Keys: A strong push above $113, with strong buying volume would act as a good signal the stock is about to shift back to the up side; that would provide a good entry point for a bullish trade by buying the stock outright or by working with call options. On the other hand, if the stock breaks down and drops below $97, the expectation would be that the long-term downward trend is likely to extend even further. That could provide a good opportunity to work the bearish side either by shorting the stock or working with put options, with a target price in the short term between $85 and $89 per share, with the stock’s 2-year low around $74 not out of the question.
By Thomas Moore Consumer Staples Defensive Stocks Investiv Daily Value Investing
21 Aug
MCHP’s debt just quadrupled. The why means this stock is a scary risk
The semiconductor sector has been one of the most interesting sectors of the market to pay attention for the last couple of months; after unquestionably beating the market for most of the the year, the sector has been battered since June by ongoing U.S. – China trade tensions. That’s put a lot of interested investors on edge, and for some that means that semi stocks should be kept at arm’s length. For me, seeing a sector under pressure usually makes me start paying attention to as many of the most fundamentally sound stocks in the sector that I can. It also means, however that the sector could stay under pressure; and in the case of semiconductors, that pressure could continue for some time. That means that you have to be very selective about the stocks you choose to follow, and you have to be willing to let a lot of others simply pass you by.

The fact is there are some semiconductor stocks that I think are pretty significantly undervalued right now, and that I think present some pretty good opportunities even if tariff-related volatility continues to work against the sector. MU and AMAT are two examples I’ve written about before, and that are already at extremely depressed price levels that I think represent some really impressive value propositions and are worth paying attention to. There is another major player in the industry that has also been beaten down pretty sharply, but that I think presents a higher level of risk to investors, at least for the foreseeable future, than most of the other big names represent.

Microchip Technology (MCHP) is a company that, until their last earnings report, which was released just a little over a week ago, had an excellent fundamental profile, and a sparkling balance sheet. So what changed? The short answer is debt, although debt by itself is not categorically a bad thing. In MCHP’s case, the company completed the acquisition of Microsemi, a provider of semiconductor and system solutions for aerospace and defense, communications, data centers and industrial markets. MCHP borrowed approximately $8.1 billion – more than four times the roughly $1.9 billion that was on their books in March – to complete the acquisition. Initially hailed as an opportunity for the company to expand its presence into aerospace and defense in particular, MCHP management revealed that Microsemi’s managers had stuffed their sales channels with excess inventory in order to inflate revenues ahead of the deal’s closing, along with a culture of “excessive extravagance and high spending” that prompted them to immediately replace all of Micorsemi’s top leadership.

The deal certainly has damped enthusiasm for the stock; the stock plunged more than $11 per share on the day of the earnings report, or a little over 11% overnight. Since that point, the stock has dropped about 7% more; since finding a top at around $104 in early June, that puts MCHP’s total decline at nearly 21% in the last two months alone. That’s bear market territory for a stock whose management also cited concerns about tariffs on their products, and disclosed about $200 million in excess inventory at Microsemi that must be reduced. Most analysts are predicting that both elements will weigh on sales for the next couple of quarters. That is the kind of negative news that is more likely to keep the stock dropping even further, and represents a much higher level of risk than even the most die-hard of value investors should probably stay away from for the time being.

Given some of the other elements that actually make management’s expertise and effectiveness quite clear, I actually think there is likely to be a very good opportunity down the road to work with MCHP; but it could be several months down the road, and at a much more depressed price – which of course also suggests that the stock is very likely to be an incredible value story eventually. Hopefully the information I’ll share below will give you an idea about where that level might be most likely to be found.

Fundamental and Value Profile

Microchip Technology Incorporated is engaged in developing, manufacturing and selling specialized semiconductor products used by its customers for a range of embedded control applications. The Company operates through two segments: semiconductor products and technology licensing. In the semiconductor products segment, the Company designs, develops, manufactures and markets microcontrollers, development tools and analog, interface, mixed signal and timing products. Its functional activities include sales, marketing, manufacturing, information technology, human resources, legal and finance. Its product portfolio comprises general purpose and specialized 8-bit, 16-bit, and 32-bit microcontrollers, a spectrum of linear, mixed-signal, power management, thermal management, radio frequency (RF), timing, safety, security, wired connectivity and wireless connectivity devices, as well as serial electrically erasable programmable read-only memories (EEPROMs) and serial flash memories. MCHP has a current market cap of about $19.4 billion.

Earnings and Sales Growth: Over the last twelve months, earnings have grown about 21.5%, while revenues increased about 25%. The company’s margin profile shows that Net Income as a percentage of Revenues in the last quarter was only about 2.9% for the last twelve months. This is a negative that should be considered against the context of the Microsemi deal, and consideration given to a historical comparison of what MCHP management has done under normal conditions. A year ago, Net Income as a percentage of revenues was a much healthier 12.5%. It is true that not all of the decline can be attributed solely to one extremely bad deal; I think pressure from decreased sales to Chinese customers, which is likely to continue, is also coming to bear. But it should at least leaven some of the negativity about the company’s ability to manage their earnings and sales effectively. Give them some time to work through the excess Microsemi inventory and get that organization folded into their existing structure and culture; at that point, and I believe we’ll be likely to see margins return to healthy levels.

Free Cash Flow: MCHP’s free cash flow is healthy, at more than $1.1 billion. This is a number that is a bit lower since the beginning of the year, but not by much – only about 6.7%. That’s pretty minimal considering the magnitude of the Microsemi problem.

Dividend: MCHP’s annual divided is $1.46 per share and translates to a yield of 1.76% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MCHP is $21.75 and translates to a Price/Book ratio of 3.79 at the stock’s current price. The stock’s historical average Price/Book ratio is 4.84, which puts a target price for the stock at about $105 per share, or nearly 21% above its current price and a little above its early June highs. It’s also worth noting that Book Value increased dramatically in the last quarter from only $14 – which can be taken a direct reflection of the Microsemi acquisition (warts and all). As I already observed, I think the stock is likely to keep dropping while concerns about Microsemi and China persist. Where is the bottom? I’m not sure; but given the already pretty high discount, I think that if the stock is anywhere around $75 – or possibly lower – when the numbers start to show the company is beginning to find its way through its current predicament, the bargain proposition could be just too good to pass up. I’ll show you how I’m coming up with that price level below.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock’s decline from a high at around $104 is hard to miss, of course; but the reason I’m showing you two years’ worth of price activity is to illustrate where I think the stock could begin to stabilize. It is currently sitting almost on top of the 50% retracement line; but given the stock’s current bearish momentum, and likely continued negative sentiment, I don’t expect that support to hold. The next support level, around $75, lines up with the 61.8% retracement line. Assuming the stock’s Book Value remains consistent (admittedly, not a given), a drop to $75 would put the stock at a 40% discount to its historical Price/Book Value ratio. That’s a pretty interesting price level, so if the company begins to show any signs of financial recovery from its Microsemi acquisition, it could be a screaming bargain at that point – or any price below it.

Near-term Keys: I really don’t see a picture for MCHP that would motivate me to want to consider any kind of bullish trade right now; any attempt to buy the stock or work with call options at its current level could only be characterized as high speculation, with prohibitively low probabilities of success. The downside risk far exceeds any upside potential right now. On the other hand, a break below the 50% retracement line at around $80 could be a good signal if you want to place a short-term, momentum-based trade to short the stock or start working with put options.
By Thomas Moore Investiv Daily Semiconductors Technology Value Investing Value Traps
20 Aug
CCL: take a cruise with a great value stock
Last week, I wrote about Royal Caribbean Cruises (RCL), which has been setting up what looks like a nice value-based opportunity. Today I’m highlighting another stock in the same industry, and one of RCL’s direct competitors, for practically the same reason. Carnival Corporation (CCL) may actually be a better opportunity than RCL for some investors. Based in London, CCL is a bigger company than RCL, with a market cap at around $32 billion, trading at a lower stock price. Like RCL and many stocks in the Leisure & Recreation Services industry, CCL has dropped from a high in late January, but since the beginning of July has begun to show some bullish strength.

Another factor that can play into CCL’s favor isn’t just its status as a large-cap stock; it also has a very strong fundamental profile, with healthy profit margins, manageable and conservative debt management, and healthy cash flows. More importantly, the value proposition for the stock is very attractive right now. I’ve speculated that the market could be setting up for yet another extension of its long-term trend – what is usually seen as the “last gasp” push before the market finally begins to turn back into legitimate bear market territory.

The catch to that opinion is that there is no way to really know when the turn will happen, and those “last gasp” rallies can last as little as a few weeks to several months. If this next rally does materialize, there could still be plenty of upside potential to capture. You want to be selective about what stocks you’re working with, and very conservative about how much of your capital you’re putting into any single position, because at this stage risk management is becoming more and more important every day. That said, CCL is a stock that is worth taking a serious look, and might be a great stock to work with.

Fundamental and Value Profile

Carnival Corporation is a leisure travel company. The Company is a cruise company of global cruise guests, and a provider of vacations to all cruise destinations throughout the world. The Company operates in four segments: North America, EAA, Cruise Support and, Tour and Other. The Company’s North America segment includes Carnival Cruise Line, Holland America Line, Princess Cruises (Princess) and Seabourn. The Company’s Cruise Support segment represents certain of its port and related facilities and other services that are provided for the benefit of its cruise brands and Fathom’s selling, general and administrative expenses. Its EAA segment includes AIDA Cruises (AIDA), Costa Cruises (Costa), Cunard, P&O Cruises (Australia), P&O Cruises (the United Kingdom) and ship operations of Fathom. Its Tour and Other segment represents the hotel and transportation operations of Holland America Princess Alaska Tours and three ships that the Company bareboat charter to unaffiliated entities. CCL has a current market cap of about $32 billion.

Earnings and Sales Growth: Over the last twelve months, earnings have grown almost 31%, while revenues increased about 10.5%. The company’s margin profile shows that Net Income as a percentage of Revenues dropped somewhat from a little over 15% over the last twelve months to almost 13% in the last quarter. That’s not insignificant, but contrasted against the rest of the data we’ll look at, I don’t believe it is a major cause for concern.

Free Cash Flow: CCL’s free cash flow is healthy, at more than $2.3 billion. This is a number that has been relatively stable, yet rising slightly, since the second quarter of 2016 from around $2 billion.

Dividend: CCL’s annual divided is $2.00 per share and translates to a yield of 3.30% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CCL is $45.10 and translates to a Price/Book ratio of 1.34 at the stock’s current price. The stock’s historical average Price/Book ratio is 1.62, which puts a target price for the stock at about $73 per share, or about 20% higher than its current price. It’s also worth noting that Book Value has increased steadily since the first quarter of 2016, despite its slight drop in the last quarter from $45.65. Another element supporting CCL’s undervalued argument is its Price/Cash Flow ratio, which is currently 23% below its historical average. That puts the stock’s target price a little above $74.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock’s downward trend dates back to January after the stock hit a 52-week high at around $73 per share. The stock is in a strong downward trend from that point, finding a trend low in July at around $56 per share. That’s a total decline up to that point of about 23%, and is one of the first technical indications that while the stock remains much higher than when it started at in 2009 when this bull market started, it could be setting up a nice value play now. The stock’s rally to around $60 as of this writing is evidence the stock’s current downward trend looks set to reverse.

Near-term Keys: A break above resistance around $62.50, marked by the 38.2% retracement line would provide good validation that trend reversal is happening, with a good chance of seeing the stock retest its 52-week high around $73 per share. A bullish investor should wait for that break to get in, either by buying the stock outright or by using call options. If the stock breaks below trend support around $56, however, you can assume that the downward trend will continue for the foreseeable future. In that case, the stock could easily drop near to its 2-year lows between $42 and $46 per share – levels last seen in 2016 prior to last year’s extended rally.
By Thomas Moore Discretionary Fundamental Analysis Investiv Daily Value Investing
17 Aug
MET looks like a value trap
There’s a popular saying that you might have heard in a lot of different settings outside of the stock market: “If it looks like a duck, walks like a duck, and smells like a duck…then it’s a duck.” It’s interesting to me that I haven’t heard or seen the saying used when talking about stocks, given how often I’ve heard it throughout my life in common, everyday settings. The more time I spend paying attention to the market, though, the more I think there’s a reason for that. The truth about stocks – and, quite frankly, one of the things that makes most people simply toss their hands in the air when it comes to active investing – is that very often, the reality about a stock, or the underlying company, is quite different than the perception.

One of the dangers of value investing is that sometimes you’ll start paying attention to a stock that looks, at least at first blush, like it could be a good bargain. It might be a very well-known and respected company, and so sometimes when people realize the stock has dropped off of recent highs, they’ll automatically assume it’s a great opportunity to buy the stock cheap. This kind of situation is often called a value trap, meaning that it looks good enough to get you interested, and perhaps even to go ahead and put your hard-earned capital into it. The trap is that sometimes there are very good reasons the stock has been dropping – and the risk is that it could go even lower.

My own investing style can put me at risk of running into these kinds of value traps. To be clear, the risks I’m talking about aren’t just about the fact the stock might already be in a long, sustained downward trend; they often aren’t readily visible unless you’re willing to open the hood and really start probing around the guts of the business. That means analyzing a lot of the company’s fundamentals and being able to accept when you see a significant amount of problematic data that can act as an early warning that there is more trouble ahead.

I believe MetLife, Inc. (MET) is a pretty good example of what I’m talking about right now. The company has great public visibility and presence, and a strong, long-standing position of leadership in the Life & Health Insurance industry. Since the beginning of the year, the stock is also down more than 20% as of this writing, putting it in clear bear market territory, and near to its 52-week low prices right now. There are some indications of good fundamentals in place, and some basic valuation measurements like the Price/Earnings and Price/Book ratios that look attractive at first glance. If you dig a little deeper, though, you’ll find that there are also some things to be concerned about, and that should give investors ample reason to think twice before buying the stock.

Fundamental and Value Profile

MetLife, Inc. is a provider of life insurance, annuities, employee benefits and asset management. The Company’s segments include U.S.; Asia; Latin America; Europe, the Middle East and Africa (EMEA); MetLife Holdings, and Corporate & Other. Its U.S. segment is organized into Group Benefits, Retirement and Income Solutions and Property & Casualty businesses. Its Asia segment offers products, including life insurance; accident and health insurance, and retirement and savings products. Latin America offers products, including life insurance, and retirement and savings products. Life insurance includes universal, variable and term life products. EMEA offers products, including life insurance, accident and health insurance, retirement and savings products, and credit insurance. MET has a current market cap of about $45.3 billion.

Earnings and Sales Growth: Over the last twelve months, earnings have been flat, while revenues increased nearly 23%. In the last quarter, earnings declined by about 4.5% while revenues increased 43%. This is a pattern that I think shows the company is becoming more and more inefficient. In addition, the company’s margin profile shows that Net Income as a percentage of Revenues dropped from a little over 6% over the last twelve months to 4.2% in the last quarter. That might not sound like a big drop, but to put it in perspective, in the last quarter, 1% of Revenues equaled about $212 million. That means the company has seen its profit margin erode by roughly $425 million.

Free Cash Flow: MET’s free cash flow is healthy, at more than $13 billion. The warning signal about Free Cash Flow – and something that I think helps to put the erosion of Net Income/Revenues in perspective – is that it has declined from from about $19 billion over the last year.

Debt to Equity: MET has a debt/equity ratio of .29. This is a very manageable number, and since the company has more than twice the amount of cash (more than $34 billion) than it does long-term debt (about $15.5 billion) there is no concern about their ability to service, or even to liquidate their debt if necessary.

Dividend: MET’s annual divided is $1.68 per share and translates to a yield of 3.68% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for MET is $54.11 and translates to a Price/Book ratio of .84 at the stock’s current price. That’s pretty attractive at first glance to value investors, who generally like to see Price/Book ratios below 1. However, the stock’s historical average Price/Book ratio is only .88, which puts a target price for the stock at only about $47.50 per share, or only about 4.2% higher than its current price. This is also where I’m seeing one of the biggest and most persuasive reasons to be concerned: the stock’s Book Value has been declining steadily for the last two years, from a high at $72.25 in mid-2016 to its current level. I read that as an erosion of the company’s intrinsic value. Warren Buffett likes to think of Book Value as a reflection of the per share amount of money a shareholder can expect to see if the company suddenly decided to pay off its debts and close up shop. Would you want to buy a stock that has seen the value of its basic business operations erode by more than twenty percent?

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock’s downward trend dates back to November of last year after the stock hit a 52-week high at around $56 per share. Since February of this year, the stock has hovered in a mostly sideways range between about $48.50 on the high side and $43 on the low end. That range has been narrowing since July, with resistance at around $46.50, with support looking steady at between $43 and $44 per share. At the bottom of a downward trend, a sideways range can often point to signs the stock is getting ready to rebound; however the narrowing of that range over the last month looks to me like a deterioration of the stock’s ability to sustain its current price levels.

Near-term Keys: The stock’s Fibonacci retracement lines are a pretty good reference point to use to look for clues that the stock could be finding some strength and might actually reverse its downward trend. Look for a break above the 38.2% retracement line at $48 as a first signal that a new upward trend is in the offing; until that happens, any kind of bullish bet on the stock is purely speculative, with a very low probability of success and not a lot of upside potential to offset the downside risk. A drop below current support at $43 could be an opportunity to look for a bearish trade, however, with a short-term target between $35 and $38 looking very possible.
By Thomas Moore Financials Investiv Daily Value Investing Value Traps
16 Aug
BWA is worth a very long look
The market has been a bit shaky this week, as concerns about emerging markets and decreasing oil demand have put investors on edge, even as U.S. economic data and earnings information continues to come in strong and healthy. The market has dropped in five of the last six days after testing the all-time high levels all three major indices set in late January of this year. Trade tensions continue to add to that sense of uncertainty. While a smart investor won’t automatically dismiss the week’s decline as just another pullback, he also won’t ignore some of the opportunities that are coming about as a result.

The automotive industry has been coming under quite a bit of pressure, with all “Big Three” automakers down for the year, as rising oil prices have increased costs and narrowed margins, and trade tensions and tariffs on steel, aluminum and autos themselves have added to the uncertainty about the industry. That volatility has rippled to the Auto Components industry as well, with stocks like Magna International (MGA), Lear Corporation (LEA), and Borg Warner Inc. (BWA) have all reversed impressive upward trends since the beginning of the year. BWA in particular is very interesting; as of this writing, it is down about 24% since early January of this year, but has begun to show signs of consolidation in the $44 to $46 price area. Could the time be right to think about this stock as a legitimate value play? There are some very compelling reasons to believe the answer is yes.

Fundamental and Value Profile

BorgWarner Inc. is engaged in providing technology solutions for combustion, hybrid and electric vehicles. The Company’s segments include Engine and Drivetrain. The Engine segment’s products include turbochargers, timing devices and chains, emissions systems and thermal systems. The Engine segment develops and manufactures products for gasoline and diesel engines, and alternative powertrains. The Drivetrain segment’s products include transmission components and systems, all-wheel drive (AWD) torque transfer systems and rotating electrical devices. The Company’s products are manufactured and sold across the world, primarily to original equipment manufacturers (OEMs) of light vehicles (passenger cars, sport-utility vehicles (SUVs), vans and light trucks). The Company’s products are also sold to other OEMs of commercial vehicles (medium-duty trucks, heavy-duty trucks and buses) and off-highway vehicles (agricultural and construction machinery and marine applications. BWA has a current market cap of about $9.2 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased almost 23%, while revenues increased nearly 13%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize business operations. The company’s margin profile shows that Net Income as a percentage of Revenues improved from a little over 5% over the last twelve months to 10% in the last quarter.

Free Cash Flow: BWA’s free cash flow is adequate, at $515.9 million. This number has improved significantly since the last quarter of 2015, when it dropped below $150 million, however it has also declined in each of the last two quarters from a high at the end of 2017 at about $620 million.

Debt to Equity: A has a debt/equity ratio of .52. This is a very manageable number, however it is also worth noting that the company has a little over $2.1 billion in debt versus a little over $361 million in cash and liquid assets as of the last quarter. The company’s balance sheet indicates their operating profits are more than adequate to service the debt they have.

Dividend: BWA’s annual divided is $.68 per share and translates to a yield of 1.54% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for BWA is $19.41 and translates to a Price/Book ratio of 2.26 at the stock’s current price. Their historical average Price/Book ratio is 2.96, suggesting suggests the stock is currently trading at a significant discount of about 30%. That is supported by the stock Price/Cash Flow ratio, which is currently about 50% below its average. Together, these providing a very compelling reason to take this stock seriously, with a long-term price of between $57 and $66 per share. That means the stock has some very good fundamental reasons to drive back to the 52-week highs it set at the beginning of the year, and even to possibly test its all-time highs, which were reached in 2014 at around $67 per share.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. Since hitting its 52-week high at around $58, the stock has followed a significant downward trend that is on the verge of extending into a long-term period of time. Note, however that since the beginning of July the stock has consistently hovered between trend support around $43 and short-term resistance around $46 per share. Compared against the downward trend, that sideways pattern is called consolidation, and it suggests the stock could be building momentum to stage a significant reversal of that longer trend. A move above that top-end resistance could be taken as confirmation a new upward trend is about the start.

Near-term Keys: The stock is currently at the low end of its consolidation range. A move above $46 would be a very good signal to act on for a bullish trade, either by buying the stock outright or by working with call options. If the stock breaks below support at around $43, however, the current downward trend would be reconfirmed, with the stock likely to drop down to its next support level, which from historical pivots would probably be between $38 and $40 per share. That could provide an opportunity to short the stock or to start buying put options.
By Thomas Moore Auto Industry Investiv Daily Value Investing
15 Aug
Is SAM worth its current stock price?
In the constant search for value, one of the questions that inevitably have to ask yourself as an investor includes how the stock you’re looking at is likely to behave in different economic cycles. Some stocks are highly cyclic; the energy and automotive industries are good examples of market segments that respond well in certain economic phases, but really struggle in others. One of the things that a lot of investors like to do when they think the sustainability of current economic strength could be at risk is to start looking for stocks that are less cyclic in nature. Looking for companies that should do well in any economic cycle means focusing on businesses that consumers will always need to rely on no matter what the economy is doing. These are often called defensive stocks, and they often revolve around industries like utilities, healthcare, and food, among a few others.

Another pocket of the market that can be pretty interesting is Beverages. Since they fit into the Food category, it’s usually pretty easy to buy into the idea that Beverage companies should have a pretty stable business model, no matter what the economy’s current state may be. You can actually drill down a little further, too to mine a sub-segment, Alcoholic Beverages to tap into (pun intended) what is perhaps an ironic twist on a defensive strategy, since sales of alcoholic drinks have shown a historical tendency to remain very healthy – and even to increase somewhat – when the economy is in decline.

The truth is that alcoholic beverage companies generally do well in bullish economic cycles, as well as in bearish ones. That is another reason that this can be an interesting segment to pay attention to; but one of the difficulties about the industry is the relatively small market presence of U.S. companies. In the case of beer, for example, 85 percent of the beer made in the United States is owned by foreign companies. How do you play the industry? One of the notable names is Boston Beer Company (SAM). You may not recognize the company name right away, because the company doesn’t fit the description of a large-cap, blue-chip stock. It’s a good bet, however that you know about their products, especially if you are a beer drinker.

The stock is interesting, because it has been following a very strong upward trend for a little more than the past year, increasing from about $130 to its current price a little above $290 per share. That’s a 124% increase in price in a little over a year; but the stock is also down since the last week of July from a high at nearly $330 per share. That’s down about 12% in just a few weeks. The stock more recently has been showing some strength, rebounding from a short-term low at around $270 per share. Is it poised to go back up and retest its $330 highs? Maybe; the company has some interesting fundamental strengths that indicate they are very well-managed and effective at managing their business. However, there are some important value-based measurements that I think suggest the stock is actually pretty risky right now. Let’s take a look.

Fundamental and Value Profile

The Boston Beer Company, Inc. is a craft brewer in the United States. The Company is engaged in the business of producing and selling alcohol beverages primarily in the domestic market and in selected international markets. The Company operates through two segments: Boston Beer Company segment, and A&S Brewing Collaborative segment. The Boston Beer Company segment comprises of the Company’s Samuel Adams, Twisted Tea, Angry Orchard and Truly Spiked & Sparkling brands. The A&S Brewing Collaborative segment comprises of The Traveler Beer Company, Coney Island Brewing Company, Angel City Brewing Company and Concrete Beach Brewing Company. Both segments sell low alcohol beverages. The Company produces malt beverages and hard cider at the Company-owned breweries and under contract arrangements at other brewery locations. As of December 31, 2016, the Company sold its products to a network of approximately 350 wholesalers in the United States and to a network of distributors. SAM has a current market cap of about $2.5 billion.

Earnings and Sales Growth: Over the last twelve months, earnings declined almost 16%, while revenues increased a little over 3%. The picture is better in the last quarter, with earnings growth at 260% and sales growing about 43%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize business operations. The company’s margin profile shows that Net Income as a percentage of Revenues is pretty consistent, at about 10% for the last quarter as well as the trailing twelve months.

Free Cash Flow: SAM’s free cash flow is modest, at $86 million. This number also has declined from about $130 million in mid-2017. Liquidity is somewhat of a question, since the company reported only about $76 million in cash and liquid assets in the last quarter.

Debt to Equity: A has a debt/equity ratio of .0. They have carried no debt on their balance sheet since the beginning of 2017. That helps to minimize the concern about the company’s cash position as it relates to their ability to service liabilities; but it still begs the question of what ability the company has to expand its operations, and how it intends to do it.

Dividend: SAM does not pay a dividend.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for SAM is $37.99 and translates to a Price/Book ratio of 7.38 at the stock’s current price. Their historical average Price/Book ratio is 7.1, suggesting suggests the stock is currently trading at a slight premium – about 7.5% – to its intrinsic value. This view is supported by the fact the stock is also trading 15% above its historical Price/Cash Flow ratio. From a strictly value-based perspective, that means the stock could be at risk to drop to a low at around $245 at minimum. That would increase the stock’s drop from its all-time high at about $330 to more than 25%.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. After hitting its all-time high, the stock gapped down by more than $30 overnight to its latest low support level around $273 per share. That support is also validated by the 38.2% Fibonacci retracement line. The stock is currently showing some nice positive momentum, so there could an opportunity to see the stock keep filling that late July gap; if it does keep rallying, however, look for resistance, however to show up somewhere in the $310 to $315 price range.

Near-term Keys: Buying volume over the last few days that the stock has been rebounding from the $273 level is significantly lower than the volume the stock has seen in the past month, which calls into question how likely the stock is to keep pushing higher. I see that as an early sign of weakness in the stock, which I believe makes the downside risk more compelling than the upside opportunity. However, a good opportunity to work the bearish side by shorting the stock or working with put options would also not have a reasonable probability of success unless the stock breaks its support as shown by the 38.2% retracement line at $259. If a drop below that level happens, the stock could easily push straight through the 50% line, all the way to the 61.8% line at around $215 per share. It is also interesting that $215 would act as the first sign of a good value play as well, since at the point the stock would be trading at a discount of roughly 20% below its historical Price/Book ratio.
By Thomas Moore Consumer Staples Defensive Stocks Investiv Daily Value Investing
14 Aug
Agilent is roughly 12% off of its all-time high; is its actual discount deeper?
When I see stocks trading at or near historical highs I almost always assume that the stock is overvalued. That’s even more true if the stock is near to an all-time high and has been following an upward trend of more than a year. With the market well into year nine of the latest long-term bullish trend, the number of stocks that fit that description is much, much higher than the number of stocks that I would normally be inclined to call undervalued.

One of the reasons trends covering different time periods are important to recognize is that over those differing time ranges, the factors that carry the greatest weight isn’t always the same. Some trends are driven primarily by nothing more than current news, market sentiment and the ebb and flow of current momentum. That’s true of short-term trends. What I like to call intermediate-term trends – those that cover three to nine months, roughly – also reflects some of the same influences as short-term trends, but are often also dictated by other, somewhat broader factors, like industry or sector momentum. Longer trends, which generally cover a year or more, are usually influenced the most by national and global economic shifts and trends, and also by a company’s individualized fundamental strength.

When you get the combination of a growing, healthy economy along with a fundamentally solid company with a growing business, it’s pretty normal to see that company’s stock price trading at or near historical highs. That’s because investors will recognize the company’s ability to grow their business and jump on board for the ride. That can obviously put the stock in overbought, overvalued territory at the extreme; but one of the things that can also happen in some cases is that the stock’s higher price really just reflects the increasing inAnsic value of the underlying business.

This is an idea that lies at the heart of value investing; a company with a growing business should naturally offer greater and greater returns to stakeholders. In a private company, that usually means that the portion of profits distributed to those stakeholders should grow each year that the business grows. In a publicly traded company, the most tangible way that growth gets back to stakeholders is by an increase in the stock’s trading price. This also implies that sometimes, a stock may be trading at or relatively close to historical or even all-time highs; but if the business is strong enough, it could actually still be undervalued.

Agilent Technologies, Inc. (A) is a company that could fit this description right now. This is a stock that has been following the market’s broad upward trend since 2009 to all-time high levels; in 2009 it was trading at around $8 per share, but at the end of January was pushing to a high price around $75 per share. It’s trading at around $66 now, which means that it’s about 12% below that January high. That isn’t usually a big enough discount to make me take the stock very seriously; but a dive into the stock’s fundamentals reveals a company with an excellent pattern of growth. That is a strong validation of the stock’s extended upward trend, but there is also an interesting case to make that the stock could drive to even higher levels than the $75 peak it reached in January. That should make the stock something to watch for any value-oriented investor.

Fundamental and Value Profile

Agilent Technologies, Inc. (A) provides application focused solutions that include instruments, software, services and consumables for the entire laboratory workflow. The Company serves the life sciences, diagnostics and applied chemical markets. It has three business segments: life sciences and applied markets business, diagnostics and genomics business, and Agilent CrossLab business. Its life sciences and applied markets business segment offers instruments and software that enable customers to identify, quantify and analyze the physical and biological properties of substances and products, as well as enable customers in the clinical and life sciences research areas to interrogate samples at the molecular level. Its diagnostics and genomics business segment includes the reagent partnership, pathology, companion diagnostics, genomics and the nucleic acid solutions businesses. Its Agilent CrossLab business segment spans the entire lab with its consumables and services portfolio. A has a current market cap of about $21.1 billion.

Earnings and Sales Growth: Over the last twelve months, earnings and revenues both increased, with earnings growing 12% and sales by about 9.5%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize business operations. The company’s margin profile improved in the last quarter compared to the trailing twelve months, from a little over 5% (TTM) to nearly 17% (quarter).

Free Cash Flow: A’s free cash flow is healthy, at $825 million. Free Cash Flow has also increased steadily since the second quarter of 2015 from a little over $200 million. The company also has excellent liquidity, with more than $3 billion in cash and liquid assets.

Debt to Equity: A has a debt/equity ratio of .39. This is very low and manageable. Even more to the point, the company’s cash is more than $1.2 billion higher than their total long-term debt, with healthy margins to keep their liquidity high even as they service their debt.

Dividend: A pays an annual dividend of $.60 per share, which translates to a yield of a little less than 1% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for A is $14.43 and translates to a Price/Book ratio of 4.56 at the stock’s current price. Their historical average Price/Book ratio is 3.5, suggesting suggests the stock is trading at a significant premium right now; however compared to their industry average, with is more than 7.0, the stock is trading at a significant discount. It is also trading 20% below its historical Price/Cash Flow ratio. Those two elements together provide an interesting basis for a long-term target price around $80, which would mark a brand new all-time high, or possibly even higher.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. At the beginning of July, the stock found intermediate trend support around $60 per share and has been showing some upward strength and momentum from that point. The stock has immediate resistance around $68 per share, but a break above that level would confirm that short-term upward trend’s strength and could start to push that trend into an intermediate time period. The stock should have support in the $63 area from the 38.2% retracement line, with support in the $59 to $60 sitting as a critical test of the intermediate downward trend’s strength.

Near-term Keys: If the stock breaks above $68, there could be a nice opportunity to either go ahead and buy the stock outright or start working with call options. A conservative approach could be start with a smaller than normal position size with a $75 target in mind; if the stock reaches that point, but continues to show strong bullish strength you could consider adding to the position at that point. If the stock breaks below $63, you should avoid any kind of bullish position. A drop below $59 would signal a confirmation and likely extension of the current downward trend to a long-term time frame and could provide an opportunity to short the stock or start using put options, with $55 as a short-term target, and $47 after that if you’re willing to ride the trend even lower.
By Thomas Moore Healthcare Investiv Daily Value Investing
13 Aug
RCL is setting up for a 20% rebound – but it could be even bigger
Among the best-performing segments in the market throughout the course of 2018 is the Consumer Discretionary sector. Since the beginning of the year, as measured by the iShares Consumer Discretionary ETF (XLY), the sector is up 12.5%. That includes a pullback of about 9.6% that coincided with the broader market’s correction in late January. The sector has recovered nicely from that point, closing on Friday just a little below an all-time high. The sector’s strong long-term trend, which extends all the way back to 2009, does imply that most stocks in the sector should be seriously over-valued; but one pocket of the sector that actually looks pretty good from a valuation standpoint right now is Leisure & Recreation Services. In particular, Royal Caribbean Cruises Ltd (RCL), which performed remarkably well until January, but hasn’t seen the same kind of push to new all-time highs since then, actually looks undervalued right now. The stock is about 20% below its all-time high price around $136 as of this writing, but looks like it could be setting up nicely, from both a value-based and technical view, for a big push higher.

As the economy continues to show strength, consumer discretionary stocks like RCL could be particularly well-positioned. The stock has an interesting tendency to perform especially well following the summer season; it would seem to be a delayed reaction to increased consumer spending and vacation planning during the summer months. That bodes well for the stock’s short-term performance if you aren’t particularly interested in a longer-term play; but if you don’t mind taking a patient approach, I think there is a much bigger opportunity lying in wait. There are risks, of course; one of the drivers for the stock over the last couple of years has been relatively affordable fuel costs. An increase in oil prices would have a direct effect on RCL’s bottom line. If some analysts fears about oil supply in the wake of renewed U.S. sanctions against Iran are correct, that risk could show up sooner than later. Trade tensions, and the impact they could have on the global economy, could also present a longer-term risk. These are factors that you should take into account against the value and technical information I’m about to present, which looks very favorable.

Fundamental and Value Profile

Royal Caribbean Cruises Ltd. (RCL) is a cruise company. The Company owns and operates three global cruise brands: Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises (Global Brands). The Company also own joint venture interest in the German brand TUI Cruises, interest in the Spanish brand Pullmantur and interest in the Chinese brand SkySea Cruises (collectively, Partner Brands). Together, its Global Brands and its Partner Brands operate a combined total of 50 ships in the cruise vacation industry with an aggregate capacity of approximately 123,270 berths as of December 31, 2016. As of July 31, 2018, the Company’s ships offer a selection of itineraries that call on approximately 540 destinations in 105 countries, covering all seven continents. Royal Caribbean International offers a range of itineraries to the destinations, including Alaska, Asia, Australia, Canada, the Caribbean, the Panama Canal and New Zealand with cruise lengths that range from 2 to 24 nights. RCL has a current market cap of about $23.7 billion.

Earnings and Sales Growth: Over the last twelve months, earnings and revenues both increased, with earnings growing nearly 33% and sales by about 6.5%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize business operations. The company also operates with a very healthy margin profile, with Net Income running at nearly 20% of Revenues on both a yearly and quarterly basis.

Free Cash Flow: TRI’s free cash flow is adequate, at $641.39 million. Their total cash and liquid assets in the last quarter was somewhat minimal, at about $109 million. I believe this is a reflection, at least in part, of a deal that was announced in June that the company would acquire a 66.7% majority stake in ultra-luxury line Silverseas Cruises, which is being financed by debt.

Debt to Equity: TRI has a debt/equity ratio of .68. Their balance sheet indicates their operating profits are more than adequate to repay their debt.

Dividend: TRI pays an annual dividend of $2.40 per share, which translates to a yield of about 2.11% at the stock’s current price.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for TRI is $51.56 and translates to a Price/Book ratio of 2.20 at the stock’s current price. Their historical average Price/Book ratio is 4.06. That suggests the stock is trading at a significant discount right now, with a target price north of $200. I’m not quite that optimistic, since the stock’s all-time high price was reached in January of this year at about $136 per share. However, the stock is current trading about 39% below its historical average, which provides a somewhat more conservative target price in the $158 range. While I would need to see the stock actually break $136 before I would be willing to suggest the stock could reach that level, I do think that both ratios together offer more than enough to reason to argue the stock has a good reason to drive back higher to test that all-time high. That’s a bargain opportunity of 20% alone, which is more than enough reason for a value investor to sit up and take notice.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s intermediate downward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock bounced off of trend support at around $101 in early June to push up to its current price. Its initial rebound off of the trend low saw the stock quickly push to around $114 per share before it retested that support in July; that second bounce higher is now providing a nice “double bottom” pattern to look at. Double bottoms are strong technical indicators that a stock is setting for a big bullish push, and is another reason I can see the stock rallying to retest its all-time highs around $136. The breakout that confirms a Double Bottom signal comes when the stock breaks the resistance marked by the most recent pivot high, which was reached in mid-June at around $114 per share, which the stock looks poised to do with any kind of bullish push this week.

Near-term Keys: If the stock breaks above $114, there could be a nice opportunity to either go ahead and buy the stock outright to hold with a $136 price target in mind if you want to take the long-term, value-oriented approach. If you’re thinking more about a shorter-term trade, there could also be a nice short-term opportunity signaled by that bullish break using call options, with a target price around the $118 – $119 level marked by the 50% Fibonacci retracement line. A bearish trade, either by shorting the stock or using put options, is a very low probability trade right now. The stock would really need to break down below its June low around $101 before any kind of bearish trade should be considered.
By Thomas Moore Discretionary Investiv Daily Value Investing